Biotech Fund Bests 99% of Peers

The biotechnology industry is renowned for it boom and bust cycle;
investment in this area is not for the faint of heart, cautions Cynthia
Andrade, contributing editor to MoneyLetter.

The industry has been on a tear. Over the past year, it has advanced almost
66%, and despite its boom and bust pattern, the sector has trounced the Nasdaq
over the past ten years, gaining 231% versus the 126% gain in the Nasdaq.

Biotech stocks soared in 2013, as FDA approvals of new drugs escalated, and
investors become more willing to embrace risk. Meanwhile, the IPO market for
biotech firms has also been robust; 46 biotech firms completed IPOs in 2013.

Another factor behind the surge is the Affordable Care Act, which will
increase the number of health-insured Americans and thereby increase the demand
for pharmaceuticals.

This increased access to healthcare is not limited to the United States, as
governments worldwide seek to increase healthcare benefits.

The demographic trend to an aging global population also boosts the demand
for biotech products. The industry has also benefited from heightened merger and
acquisitions activity.

Often, it's the big pharma firms with large cash reserves and dwindling
pipelines looking to boost their new product potential.

The iShares Nasdaq Biotechnology Fund (IBB)
offers fairly broad exposure to the biotechnology industry; it tracks the Nasdaq
Biotechnology Index, which is weighted by market capitalization.

That means the fund, unlike other biotech sector funds that employ an
equal-weight strategy, has its greatest exposure to more established and
large-cap biotech firms. For IBB,
that means it has been less volatile than most other biotech funds.

Looking at the portfolio, 55% of assets are in large-caps, 25% in mid-caps
and the remainder in small firms. The fund has 56% of assets in its top ten
holdings, which include Biogen (BIIB),
Gilead (GILD),
Amgen (AMGN),
Regeneron (REGN),
and Celgene (CELG).

IBB
has been a standout performer in recent years and over the longer-term. For the
trailing year, its 86.4% gain outpaces 95% of Morningstar's healthcare funds.
Over the trailing ten-year period, it surpasses 99% of its peer group.